The Medici Meltdown

The 15th century Medici banking collapse may seem more relevant in today’s financial meltdown, opposed to the 1929 collapse. Many journalist have the idea that capitalism has no historical roots–but Harvard historian, Raymond De Roover, knows better, as his paper, The Rise and Decline of the Medici Bank (1397-1494), highlights how modern capitalism, based on private ownership, was invented by Italian merchants and bankers. At the height of the Florentine banking empire it was the largest in Europe with branches in Geneva, Avignon, Bruges, and London as well as in Rome, Naples, Venice and Milan. As troubles at home found their way on the Medici’s doorstep, we begin to see irregularities and rash uncoordinated lending throughout European banks.  Sound familiar?

The fear of being annihilated by foreign powers, combined with the lack of transparency, allowed the ruler of the Republic to turn it into an effective tyranny. With the declared purpose of defending Florentine freedom and its way of life, Lorenzo raised taxes for the war and embezzled banking funds with the result (does this sound familiar, anyone?) of creating a huge credit crunch.

The enlightened policies of public artistic patronage like those of Cosimo and Lorenzo were a magnificent facade for their political success and survival–and ultimately for their financial failure.

Read the entire article here.

The Icelandic meltdown and dilettantism of finacial markets

So how can we calculate the absolute risk aversion in the Icelandic banking industry?—As the curvature of u(c) increases, so does one’s aversion to risk..Outside of those parameters I’m lost.

It’s funny because if you don’t study history you get the great opportunity of repeating it..1,000 years ago Icelanders left Scandinavia in search of freedom and a better life far away from Medieval feudal establishment. Combine this cultural risk-seeking behavior with a desire to be modern, and a neo-culture of inflation and debt, and we begin to see the very underpinnings of a financial meltdown.

The people are industrious and dynamic, and they have a tendency to take on tasks that are beyond them. The current prime minister used to be the foreign minister and he also happened to be the minister of finance – at the time when the head of the central bank, who also did a stint as foreign minster, was the prime minister, and the current finance minister was serving office as minister of fisheries.

Now things are almost back to the way they were in the 80s: the inflation rate is almost double-digit; the state controls the banks and rations currency exchange. All we need now is to re-introduce the beer-ban, and it will look as if the Icelanders want to start the process of globalisation all over again.

Read the entire article via Financial Times Deutschland.